For a Change, Default Rates Rise

Submitted by Doug Lederman on September 14, 2006 - 4:00am

The rate at which borrowers defaulted on their student loans last year rose for only the second time since the government, lenders and colleges began a major effort in 1992 to bring the rates down, according to figures released Wednesday by the U.S. Education Department.

In announcing [1] that 5.1 percent of borrowers who began repaying their loans between October 1, 2003, and September 30, 2004 had defaulted on those loans by September 2005, department officials emphasized the positive: "I'm pleased to see that default rates remain at historically low levels," Secretary Margaret Spellings said in a news release, noting that the rate was the "second-lowest ever recorded." Default rates peaked at 22.4 percent in 1992, and have fallen sharply and relatively consistently since then.[2]

But the rate for the cohort of borrowers who entered repayment in 2004 did rise from 4.5 percent the year before, an increase of 13 percent. Rates rose pretty much across the board, for virtually every sector of higher education.[3]

The rate for public institutions rose to 4.7 percent from 4.3 percent (two-year public colleges saw their rate increase to 8.1 percent from 7.6 percent, and four-year colleges to 3.5 percent from 3.3 percent), and the rate for private four-year colleges ticked up to 2.8 percent from 2.6 percent. The default rate for borrowers from for-profit colleges climbed more sharply, to 8.6 percent in 2004 from 7.3 percent in 2003, a rise of nearly 18 percent.

Education Department officials, lenders and others played down the significance of the upturn. They attributed the rise to the mounting debt burdens students are accumulating to pay for college, often in response to rising tuitions and static grant funds, and to rising interest rates.

"Changes in the composition of the student loan portfolio coupled with general economic conditions at the time contributed to this increase," Terri Shaw, chief operating officer at the department's Federal Student Aid office, said in a prepared statement. "While we never like to see an increase, even a small one, in the [cohort default rate], we experienced a similar slight increase in FY 2000 due to the economic conditions at that time. Overall, the CDR continues to trend downward and remains historically low by any standard."

"It is more important than ever that we continue our outreach to student borrowers to educate them about their responsibilities and the resources available to assist them in their repayment obligations," Shaw added.

Alexa Marrero, vice president of communications and industry relations for the Education Finance Council, which represents state-based secondary markets that help students in their states gain access to loans, also emphasized the fact that the rate remains very low and said she believed that changes approved by Congress in February as part of the Higher Education Reconciliation Act could "make it easier for lenders and guarantors to work with borrowers to prevent defaults, and rehabilitate loans once they have gone into default."

Others suggested that the one-year increase may portend a larger problem. “The chickens may be coming home to roost for higher education and the federal government,” said Michael Dannenberg, director of education policy at the New America Foundation. “Get ready for a rocky road ahead.”

The combination of rising tuitions, debt and interest rates suggests that “danger lurks ahead," Dannenberg said. "Congress raised interest rates for the year beginning in July 2006 to 6.8% for consolidation loans. We may see an even higher default rate this time next year, because of higher government-set student loan interest rates. A higher student loan default rate means higher costs to taxpayers, since the government guarantees student loans against default.”